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A very mixed bag of views among the ‘competition’

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Mill-owned service centers An idea whose time has come, gone and come back again?

Wall Street hasn't jumped on the bandwagon and most mills have found other ways to invest the profits they've piled up in the past four years, when global metal markets began their climb upward. But service center executives, a number of whom aren't themselves crazy about the prospect of mill ownership, aren't dismissing the idea out of hand, either.

"Nothing's impossible," said David H. Hannah, chief executive officer of Los Angeles-based Reliance Steel & Aluminum Co. "We don't think it's necessary and we don't think it needs to be done. At the same time, who knows whether or not it will happen again?"

One reason distributors think mills could eventually buy their way into the service center industry is the mountain of money they've made since the global market for steel and other metals turned around in 2004. Once they've bought all the iron ore mines and fabrication plants they can, the thinking goes, they'll want to increase their presence in distribution.

William Hickey, president of Lapham-Hickey Steel Corp., Chicago, noted that producers have already acknowledged the good value of service centers and they "don't need to reinvent the mill" at the distribution level. It probably makes more sense, he said, for mills to choose a route along the supply chain that leads instead to large-volume processing, as Charlotte, N.C.-based Nucor Corp. did when it said earlier this year that it will spend between $115 million and $125 million for a 500,000-ton-per-year sheet and coiled plate processing center in Mexico.

Still, not everyone in the service center industry is a doubter.

"I happen to be one of those who thinks that it's going to happen," said John Campo, vice president of sales and marketing at O'Neal Steel Inc., Birmingham, Ala., who believes it's just a matter of time before "we see movement in that direction."

Campo noted that the historical pattern for mill involvement in distribution had been for U.S. producers to treat service centers not as profit centers but "as a dumping ground for excess capacity." But the "rules have changed," he believes, and the U.S. steel industry today has a lot more foreign owners, some of them with "successful business models" running distributors in their home markets.

Campo also thinks mill ownership would help "shorten the supply chain, making it more efficient and effective," as long as service centers continue to operate as profit centers.

Reliance Steel's Hannah pointed out that it's not easy to compare the performance of independent U.S. service centers with mill-owned distribution operations in Europe. He noted that detailed information normally isn't made public overseas to the same degree that it's available in this country. Given this lack of transparency, it nevertheless appears to Hannah that, unlike in the United States, mill-owned service centers in Europe are often used to move large volumes of carbon steel to large buyers. A mill that's looking to pick up distribution capacity in the United States would probably also be interested in moving large amounts of its own product, he said, and that might not be the best operating strategy for running a service center with a diversified product line.

Eric Steinhauer, president and chief executive officer of Industrial Metal Supply Co., a full-line distributor in Sun Valley, Calif., said that successful distributors have "an entirely different mindset" than mills. "We're all about service, turnaround and making the delivery at 11 o'clock at night, if this is what's called for," he said. This culture doesn't necessarily fit into the mill business model, which thrives on orders scheduled "way in advance" and a steady order flow.

Hickey said that he thinks producing mills might find a better use for their money. "Maybe they should put it away for a rainy day," he said.

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